Taxes in Puerto Rico for Individuals

Puerto Rico offers a unique tax environment unlike any other U.S. jurisdiction. While residents are U.S. citizens, the island operates under its own tax code, separate from the U.S. federal system in many respects. This makes Puerto Rico particularly attractive for individuals looking for strategic tax advantages—especially under the well-known Act 60 incentives program.

Whether you’re considering moving to Puerto Rico, already living on the island, or just curious about how taxation works for individuals, this guide will break down the key elements of Puerto Rico’s personal tax system.

1. Overview of Puerto Rico's Tax System

Puerto Rico has its own Department of Treasury (known locally as Hacienda) and enforces a tax code independent from the U.S. Internal Revenue Service (IRS) for Puerto Rico-sourced income.

Here’s the most important distinction:

If you are a bona fide resident of Puerto Rico, you do not pay U.S. federal income tax on Puerto Rico-sourced income. Instead, you pay local Puerto Rico income taxes.

This creates substantial tax planning opportunities for individuals who live and work primarily on the island.

2. Who Is Considered a Bona Fide Resident?

To take advantage of Puerto Rico’s tax treatment for individuals, you must meet the bona fide residency test, which includes:

1. Physical Presence Test

You must spend at least 183 days in Puerto Rico during the tax year.

2. Tax Home Test

Your principal place of business must be in Puerto Rico.

3. Closer Connection Test

You must demonstrate stronger ties to Puerto Rico than to the mainland U.S. (e.g., home, family, bank accounts, voting registration, etc.)

If you meet all three, you are considered a bona fide resident and can benefit from the local tax system and certain federal exclusions.

3. Puerto Rico Individual Income Tax Rates (2024)

Puerto Rico imposes a progressive income tax on individuals. The rates are generally lower than federal tax rates for similar income levels.

Puerto Rico Income Tax Brackets for Individuals:

Note: These rates apply to Puerto Rico-sourced income only. Other deductions, credits, and exemptions may apply.

4. U.S. Federal Tax Implications for Residents

If you are a U.S. citizen and a bona fide resident of Puerto Rico:

• Puerto Rico-sourced income is generally exempt from U.S. federal income tax.

• U.S.-sourced income (e.g., dividends from U.S. stocks, U.S. business income) remains taxable by the IRS.

If you split your time between Puerto Rico and the U.S. or maintain ties to the mainland, you may still have federal obligations. It's crucial to keep accurate records and seek professional advice.

5. Capital Gains Tax for Individuals

Puerto Rico’s treatment of capital gains is a key attraction for many investors.

Long-Term Capital Gains:

• Standard residents: Taxed at a flat 15% on long-term capital gains (held more than 1 year)

• Under Act 60 (Individual Investors):

  • Capital gains from assets acquired after becoming a resident may be 100% exempt from Puerto Rico income tax.

  • Assets acquired before moving to Puerto Rico may be partially taxable in the U.S. and Puerto Rico, depending on timing.

Short-Term Capital Gains:

• Taxed as ordinary income based on Puerto Rico tax brackets.

6. Dividend and Interest Income

Standard Puerto Rico Residents:

• Puerto Rico-source dividends: Taxed at 10%

• Interest income: Taxed at 10% to 17%, depending on the type

Act 60 Residents:

• Dividends from Puerto Rico companies may be fully exempt

• U.S.-source dividends and interest are still taxable federally by the IRS

7. Self-Employment and Freelancers

Self-employed individuals in Puerto Rico are subject to local income tax, and potentially Social Security and Medicare taxes under U.S. law.

Key Notes:

• Income earned for services rendered in Puerto Rico is subject to local tax, not federal.

• U.S. self-employment tax (15.3%) may still apply for U.S. citizens.

• Some Act 60 businesses may qualify for a 4% corporate tax rate if organized as an eligible entity.

Freelancers should structure their business carefully—many set up Puerto Rico entities to optimize tax treatment.

8. Other Taxes for Individuals

Sales and Use Tax (SUT)

• Puerto Rico has a 11.5% sales tax, one of the highest in the U.S.

• Applies to most goods and some services, including professional services

Property Taxes

• Real property tax is assessed by CRIM (Municipal Revenue Collection Center)

• Rates range from 1.03% to 1.30% of the assessed value, which is often lower than market value

• Owner-occupied homes may qualify for exemptions

Municipal Taxes

• Certain self-employed professionals may be subject to a municipal gross receipts tax (Patente Municipal) depending on the type and location of their work

9. Act 60: The Individual Investor Incentive (Formerly Act 22)

The Individual Investors Act, now part of Act 60, provides major tax benefits for new residents who move to Puerto Rico.

Benefits:

• 100% exemption on all long-term capital gains accrued after becoming a resident

• 0% tax on Puerto Rico-source interest and dividends

• Exemption is valid for the duration of your 15-year tax decree

Requirements:

• Become a bona fide resident

• Apply for and obtain an Act 60 tax decree

• Make an annual charitable donation ($10,000 minimum as of 2024)

• File annual reports and pay a compliance fee (typically $300–$5,000)

Act 60 has attracted thousands of mainland U.S. investors to Puerto Rico, particularly those with large capital gains or dividend income.

10. Tax Filing in Puerto Rico

As a resident, you must file your income taxes with Puerto Rico’s Hacienda using:

• Form 482 (Puerto Rico Individual Income Tax Return)

If you also have U.S.-source income or aren’t a bona fide resident, you may need to file a U.S. federal return (Form 1040) as well.

Important:

• Puerto Rico uses a different tax year and system than the IRS

• Electronic filing is encouraged, but local CPAs or tax professionals are often needed

• Act 60 decree holders must also file annual compliance reports

11. Summary: Key Takeaways

Final Thoughts

Puerto Rico offers significant tax benefits for individuals who meet residency requirements and structure their financial lives accordingly. From reduced income tax rates to 0% capital gains under Act 60, the island provides powerful incentives for investors, entrepreneurs, and remote professionals.

However, the rules are nuanced and the stakes are high—especially when U.S. and Puerto Rico tax codes interact. If you’re considering a move or want to optimize your tax situation as a Puerto Rico resident, it’s critical to:

• Consult with a tax advisor experienced in both U.S. and Puerto Rico law

• Understand your residency status and how it affects tax obligations

• Maintain documentation to prove compliance

With proper planning and a genuine commitment to residency, Puerto Rico can offer not only sun and sand—but also serious savings.